Budget 2013 observations

Here are a few thoughts on Budget 2013:

The most eye-catching policy to come out of this Budget is the Wage Credit Scheme, under which the government will co-fund 40 per cent of wage increases for Singaporean workers earning up to a gross monthly wage of S$4,000. This is a further departure from the government’s previous insistence that wage increases must follow productivity improvement. Now, despite a reported productivity drop of 2.6% in 2012, it is pushing ahead for firms to pay their local workers better. This shows a gradual recognition (or resignation, depending on how you look at it) by the government that the economic and political climate can no longer wait for productivity growth to come through; that perhaps by putting the cart before the horse against conventional wisdom, the incentives for SMEs to operate smarter will be stronger.

Similarly, direct transfers to the lower income group via Workfare will increase with the income ceiling rising to $1,900, from $1,700 previously. This is the government’s alternative to the minimum wage, and it remains debatable which is the better way forward. Workfare has to go hand-in-hand with foreign worker quotas and levies to fix the over-reliance on foreign labour, so it’s good that there is further tightening announced. Comparing Workfare with minimum wage, though, the crucial difference is who’s paying for this topping up of wages. While this pro-business approach is good for the economy in general, it removes the onus on firms to pay better when the government is always in hand to make up the shortfall. Companies that undercut workers continue to get away with it. For a government that is long fearful of the welfare state, it is nevertheless moving towards greater social support in this extension of Workfare coverage, when a large part of the burden should be on firms themselves to pay better.

Budget 2013 ticks many right boxes: helping the lower and middle income, providing greater assistance to companies to restructure, tightening foreign worker influx, and taxing the ultra-rich on property and cars. With a FY2012 budget surplus of $3.86bn, the government can certainly afford to be generous. This surplus is much higher than the originally estimated $1.27bn, so it’s interesting to see where the better than expected amount of £2.57bn came from. If we look at just operating revenue, the revised total was $55.18bn versus estimated $53.08bn, or a better than expected surplus of $2.1bn. This is broken down in the diagram below.

Apart from the catch-all “Other Taxes”, the top items are all property and vehicle related taxes. While this might not come as a surprise to most given current high housing and COE prices, we must remember that these are surpluses on top ofbudget estimates for 2012. Housing and COE were already at high levels at the end of FY2011, yet the government did not make large provisions for them for 2012. Even if they were being conservative, the underestimation is significant, especially for stamp duty. Does this mean that the government was expecting both housing and COE markets to cool in 2012, but instead they just went out of control?

A budget surplus is a healthy sign and it is good that the government is spending big to redistribute to Singaporeans. However, this unexpected huge surplus came at the price of high inflation and increasing debt levels due to higher housing and car loans. There are inherent problems in the economy resulting in wealth not being distributed properly during its normal course of functioning that necessitates a bigger role and burden on the government to provide subsequent transfer. This is not meant to be a criticism on the government — because the Budget is a good one — but the emphasis must remain on fixing these root causes of inequality and escalating prices than on retrospective transfers and subsidies.

The new vehicle loan down payment rule from MAS to prevent over-borrowing is an example of not fixing the root problem. While the intentions are good and the reasons sound, it comes across as a drastic over-reaction by the authorities to rein in borrowing, perhaps hoping to provide a check on COE prices as well. It is a blunt rule that ignores the fact that increased borrowing is due more to high COE prices than buyers going for unnecessarily fancy cars.

While I tend to view cars as more want than need, I can’t profess to know the situation of those who feel it’s an absolute necessity, and these are the people penalised. The rule also disadvantages those with stable incomes who may not have a sizeable sum of cash at present, yet it does nothing to prevent the millionaire car enthusiast from adding another to his garage collection. So while the Budget is progressive-based, this separate move by MAS is regressive in nature. Various suggestions have been made over the past two years on how to fix the COE problem, such as balloting or priority schemes, and all these deserve closer study. The last thing we want to do is to solve the problem by shutting out young families, the less-abled, or families with aged members. It will only reinforce the view amongst some that cars can no longer serve to improve the lives of the average person, but are mere toys for the rich.